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Quantitative Easing QE is an unconventional monetary policy adopted by the central bank (e.g.: RBI) to stimulate the economy. Whenever the economy stagnates, and interest rates are very low (near ‘zero’), the central bank uses QE to increase the money supply in the economy. The way it is done is by buying government bonds or private. However there’s a catch: the money to buy the government bonds is ‘created digitally/electronically’ (it means that this money did not exist, it was created by the central bank, similar to just printing the money and infusing in the economy). Risks · The money infused in the economy is supposed to help boost consumption by way of increased lending and borrowing from the banks. So, it may happen that banks might not lend the money to people or people might not borrow the money at the new rate of interest. · There is the chance of sudden inflation (high). This happens due to the excess supply of money in the market but fewer goods to satisfy the demand, which will increase the prices of the goods. · Creating of money from thin air reduces the value of the money. This means that it’s value decreases in the international market. Currency Depreciates, which is good for the export industry but bad for imports. So, the overall effect of this will depend on other economic conditions. This method of reviving economic activity was used by USA (FED), Japan (bank of Japan), UK (bank of England) and European bank. While FED and Bank of England were successful in implementing the policy, Bank of Japan which was the first to use QE, failed to stimulate any economic activity. Quantitative easing is a good method of reviving economic activity, provided it is used infrequently, and supply of money is not very huge and sudden, in which case inflation follows few years down the line.
Swachh bharat mission and ceramics
Swachh Bharat Mission The campaign launched by Hon. Prime minister Shri Narendra Modi synergises with the ceramic tiles industry and Sanitary ware industry. The campaign focuses on building toilets all around the country; ensuring hygienic sanitation for everyone, especially women and children. Since the Independence Day Speech mentioning “Swachh Bharat Abhiyan” in 2014, share prices of Cera Sanitaryware Ltd has risen 33.9%, Somany Ceramics Ltd 41.8%, Kajaria Ceramics Ltd 23.2% and HSIL Ltd 10.9%, sharply outperforming the benchmark Sensex, which added 7% in the same period. This shows the industry’s confidence in the campaign to boost their sales and demand. The campaign has raised the demand for Indian style toilets, hence there is more scope for local manufacturers to fulfil the demand, and Chinese manufacturers will not eat away their share.
Morbi and Ceramics
Ceramics in Morbi Home to more than 600 manufacturing units, it is the largest ceramics manufacturing cluster in India and second largest in the world. It mostly comprises of SMES, but, they often cater to big brands in the industry. It’s not surprising that more than 80% of India’s production comes from Morbi. It employs directly more than 0.35 million people and around 12000 other indirectly, generating a revenue of more than ₹225 billion. Kajaria ceramics, HR Johnson, Asian tiles (AGL Tiles), Somani Tiles, NITCO are few of the big companies that outsource their requirements to Morbi or, are based in Morbi. The industrial area produces Wall tiles, Floor tiles, Vitrified tiles, Polished Glazed Vitrified Tiles, Twin Charged Tiles, Multi - Colour Charged Tiles in various formats starting from 20X40 cm to 120X180 cm in a wide range of designs and colours. It also produces sanitary ware, industrial ceramics and technical ceramic products. Key to success · Availability of cheap Labour. · Mundra and Kandla ports nearby, make export easy. · Easy availability of raw materials and uninterrupted power supply. · GAIL: industrial gas line provides for a cheaper source of fuel with uninterrupted supply. · Exports to markets such as Middle East, Europe, Bangladesh, etc. More about the exports and imports of ceramics and associated machinery will be discussed in the coming sections (name, page number of the section, hyperlink it)
Organised Market in Ceramics industry
Organised The Indian Ceramics & Tiles Industry is highly fragmented with presence of numerous family-owned entities apart from some very large integrated manufacturers leading to high level of competition. The unorganised sector accounts for nearly 50% of the ICTI, represented by more than 500 family-owned entities and around 15 entities in the organised segment. The composition of the ICTI provided opportunity for consolidation and scaling up the operations by the entities in the organised segment in a cost-effective manner. During the four years ended March 2015, there has been continuous increase in installed capacity, through organic and inorganic expansions by the organised players (Refer Chart 1 for installed capacity of 11 leading players). The manufacturers have resorted to either of the above investment methodology depending upon their requirements and feasibility; majority of the capacity addition has been through entering in to Joint Venture (JV) agreements with small and medium scale players or outright acquisition of existing operational units. Organised players benefit from local expertise and faster penetration in the region through meeting local demand with local supply and immediate scaling up of operations. Furthermore, inorganic expansion has helped organised players to generate higher returns through lower capital commitment and de-leverage their balance sheet from higher cash flow generated through incremental sales volume. Unorganised and small players, too, stand to gain from the partnership as they are assisted by larger entities in streamlining their manufacturing operations and generate economies of scale, expand geographical reach through use of well-established marketing channels of organised players and ensure compliance of stringent pollution control norms of the State and Central Government’s Pollution Control Boards.
WorldCom (USA mobile operator) Fraud
CASE SUMMARY WorldCom was a provider of long distance phone services to businesses and residents. It started as a small company known as Long Distance Discount Services (‘LDDS’). What happened Due to acts of CEO Bernie Ebbers, there were inflated assets by $11 billion, leading to 30,000 lost jobs and $180 billion in losses for investors. Methodology Underreported line costs by capitalizing rather than expensing, and inflated revenues with fake accounting entries. WorldCom’s internal auditing department then discovered what a loss of $3.8 billion Result Ousting of CEO and filing for Chapter 11(Bankruptcy). FLOW OF EVENTS Early 2001 WorldCom shows signs of financial troubles: rates and revenues decline and debt rises. July 2001 WorldCom receives $2.65 billion in loans from 26 banks to be repaid by the end of 2001. Apr. 30, 2002 Bernard Ebbers resigns as CEO of WorldCom and is replaced by vice chairman John Sidgmore. Jun. 25, 2002 CFO Scott Sullivan is fired after improper accounting of $3.8 billion in expenses covering up a net loss for 2001 and the first quarter of 2002 is discovered. Jun. 28, 2002 WorldCom fires 17,000 employees to cut costs. Jul. 21, 2002 WorldCom files for reorganization under Chapter 11 Bankruptcy, an action that affects only the firm’s U.S. operations, not its overseas subsidiaries. Aug. 9, 2002 Continued internal investigations uncover an additional $3.8 billion in improperly reported earnings for 1999, 2000, 2001, and the first quarter of 2002, bringing the total amount of accounting errors to more than $7.6 billion. Nov. 8, 2002 WorldCom files additional bankruptcy petitions for 43 of its subsidiaries. Nov. 15, 2002 Michael D. Capellas, former president of Hewlett-Packard Company, is named chairman and CEO. Mar. 14, 2003 WorldCom announces that it will take one-time $79.8 billion write-off. May 19, 2003 WorldCom agrees to pay investors $500 million to settle civil fraud charges. Jul. 7, 2003 A federal judge approves a $750 million settlement between WorldCom and federal regulators. Jul. 31, 2003 The General Services Administration notifies WorldCom that it is ineligible to win new federal contracts until it improves accounting controls. Aug. 6, 2003 A bankruptcy judge approves a $750 million settlement of civil fraud charges made by the Securities and Exchange Commission on WorldCom investors' behalf. Aug. 12, 2003 WorldCom appoints former AT&T Corp. executive Richard R. Roscitt as its new president and chief operating officer. Dec. 22, 2003 Federal prosecutors say they intend to show that former CFO Scott Sullivan was involved in 13 kinds of accounting fraud in addition to financial wrongdoing Jan. 7, 2004 The government lifts the suspension that prevented WorldCom from receiving new federal contracts. Apr. 20, 2004 MCI officially emerges from bankruptcy, 21 months after filing the largest Chapter 11 case in history. May 10, 2004 MCI says it will eliminate 7,500 jobs (15 percent of its workforce). Feb. 14, 2005 Verizon Communications Inc. announces a $6.75 billion deal to buy MCI Inc. Mar. 15, 2005 Former WorldCom CEO Bernard J. Ebbers is found guilty of conspiracy, securities fraud, and making false filings with regulators. He is sentenced to 25 years in prison. Aug. 11, 2005 Former CFO Scott Sullivan is sentenced to five years in prison.
WORLDCOM FRAUD case description
CASE WorldCo­m took the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002. Unfortunately for thousands of employees and shareholders, WorldCom used questionable accounting practices and improperly recorded $3.8 billion in capital expenditures, which boosted cash flows and profit over all four quarters in 2001 as well as the first quarter of 2002. This disguised the firm’s actual net losses for the five quarters because capital expenditures can be deducted over a longer period of time, whereas expenses must be subtracted from revenue immediately. WorldCom also spread out expenses by reducing the book value of assets from acquired companies and simultaneously increasing the value of goodwill. The company also ignored or undervalued accounts receivable owed to the acquired companies. These accounting practices made it appear as if WorldCom’s financial situation was improving every quarter. As long as WorldCom continued to acquire new companies, accountants could adjust the values of assets and expenses. Internal investigations uncovered questionable accounting practices stretching as far back as 1999. Investors, unaware of the alleged fraud, continued to purchase the company’s stock, which pushed the stock’s price to $64 per share. Even before the improper accounting practices were disclosed, however, WorldCom was already in financial turmoil. Declining rates and revenues and an ambitious acquisition spree had pushed the company deeper in debt. The company also used the rising value of their stock to finance the purchase of other companies. However, it was the acquisition of these companies, especially MCI Communications, that made WorldCom stock so desirable to investors. How the fraud happened In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements. That wasn't enough to boost the earnings that the CEO wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found. These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. It also made WorldCom's assets appear more valuable. How it was discovered After tips were sent to the internal audit team and accounting irregularities were spotted in MCI's books, the Securities Exchange Commission requested that WorldCom provide more information. The SEC was suspicious because while WorldCom was making so much profit, AT&T (another telecom giant) was losing money. An internal audit turned up the billions WorldCom had announced as capital expenditures as well as the $500 million in undocumented computer expenses. There was also another $2 billion in questionable entries. WorldCom's audit committee was asked for documents supporting capital expenditures, but it could not produce them. The controller admitted to the internal auditors that they weren't following accounting standards. WorldCom then admitted to inflating its profits by $3.8 billion over the previous five quarters. A little over a month after the internal audit began, WorldCom filed for bankruptcy. Causes Internal Environment The executive and strategic decisions at WorldCom were characterized by rapid growth through acquisitions. ‘Growth, growth, growth...’ was the moto. By 1998, WorldCom had been involved in mergers with sixty companies. Together, these transactions were valued at more than $70 billion, the largest of which, MCI Communications Corporation (‘MCI’), was completed on September 14, 1998, and was valued at $40 billion. Once WorldCom acquired the new companies, it failed to properly integrate the systems and policies that not only led to very high levels of overheads in proportion to the revenues but also to an extremely weak internal control environment. Due to the fast pace of the acquisitions as well as management’s neglect, the accounting systems at WorldCom were unable to keep up with integration and efficiency. The lack of internal controls allowed manual adjustments to be made in the system without the emergence of any red flags, thereby minimizing any chance of detection Company Culture The growth through acquisitions ‘strategy’ at WorldCom was enforced and reinforced by top management. The consistent pressures from top management created an aggressive and competitive culture that did not contain any communication of the need for honesty or truthfulness or ethics within the company. There was a large focus on revenues, rather than on profit margins and the lack of integration of accounting systems allowed WorldCom employees to move existing customer accounts from one accounting system to another. The employees at WorldCom did not have an outlet to express concerns about company policy and behavior either. Special rewards were given to those employees who showed loyalty to top management while those who did not feel comfortable in the work environment were faced with obstacles in their need to express their concerns. The combined management allowed the creation of a culture that was more suitable for a sole proprietorship than for a billion dollar corporation. The aggressive nature of the managing style such as the plethora of acquisitions as well as the failure to integrate them properly created an environment where employees were pressured to report high growths quarter by the quarter. Board of Directors The directors at WorldCom were from different backgrounds. While some had widespread knowledge and experience of business and legal issues, others were appointed due to their connections with Ebbers. The mix of the Board and the close ties to Ebbers led to the Board‟s lack of awareness on WorldCom‟s issues. The Board was inactive and met only about four times a year, not enough for a company growing at the rate that it was. Audit Committee and Internal Audit The lack of independence and awareness of the Board as a whole trickled down to the audit committee. The committee‟s chairman, Max Bobbitt, was very loyal to Ebbers. Hence, the members of the committee, including Bobbitt, were either unaware or had known about the fraudulent misstatements for the years 1999, 2000, and 2001 and choose to ignore it. According to Breeden (2003), the Committee oversaw the $30 billion revenue company when it met for about three to six hours once a year. WorldCom‟s Audit Committee failed to meet with the Internal Auditors of the company, who had the duty to provide the Audit Committee with an independent and objective view on how to improve and add value to WorldCom’s operations. Not only were the personnel in the internal audit department not enough for a large company, but they also lacked the proper training and experience to conduct the testing of the company’s controls. The Misstatement of Line Costs Line costs are the costs associated with carrying a voice phone call or data transmission from the call’s origin to its destination. If a WorldCom customer made a call from New York City to London, the call would first go through the local phone company’s line in New York City, then through WorldCom’s long distance, and finally through the local phone company in London. WorldCom would have to pay both the local companies in New York City and London for use of the phone lines; these costs are considered line costs. Not only were line costs WorldCom’s biggest expense but were also approximately half of WorldCom’s total expenses. Especially after the collapse of the dot com bubble in early 2000, cost savings became extremely important, so important that line cost meetings were the only meetings with regular attendance by top management. WorldCom’s top management strived to achieve a low line cost to revenue ratio (‘line cost E/R ratio’), because a lower ratio meant better performance whereas a higher ratio meant poorer performance. To report better performance and growth, Sullivan implemented two improper accounting methods to reduce the amount of line costs: release of accruals from 1999-2000 followed by the capitalization of line costs in 2001 through early 2002. Releasing Accruals During the fraud period at WorldCom, was characterized by the estimation of costs that were associated with using the phone lines of other companies. The actual bill for the services was usually not received for several months. This meant that some entries made to the payables could be overestimated or underestimated. In the case that the liability was overestimated, when the actual bill was received there would be a surplus of liabilities that when ‘released’ would result in a reduction of the line costs: Accounts Payable 1,000,000 Cash Paid to Suppliers 900,000 Line Cost Expense ‘release’ 100,000 WorldCom adjusted its accrual in three ways. Some accruals were released without even confirming if any accruals existed in the first place. Second, if WorldCom had accruals on its balance sheet it would not release them for the proper period and instead keep them as ‘rainy day’ funds for future uses. Lastly, some of the accruals released were not even established for line costs, thereby violating GAAP by using one expense type to offset another. Line costs were very significant to WorldCom‟s bottom line. Ebbers made public promises to stockholders and Wall Street that WorldCom would keep those costs low. Therefore, the managers at WorldCom were continuously under pressure to find ways to reduce those costs. With the burst of the Internet and telecomm bubbles, the pressure increased and more ways had to be discovered to keep on reporting the false numbers. WorldCom‟s competitors such as Sprint and AT&T had line costs that were 52% of revenues. WorldCom reported line costs of about 42% of revenues, in reality these costs were 50%-52% of revenues. Although WorldCom‟s line cost ratio was in line with the telecomm companies in the industry, it chose to report lower line costs because that is what the analysts expected. By meeting analyst expectations, WorldCom would make Wall Street happy. Wall Street‟s contentment with WorldCom would result in an increase in investments and thereby a higher stock price for WorldCom. The higher the stock price, the cheaper it would become for WorldCom to acquire other companies. The pressure worsened by early 2001 as Sullivan tried to find different ways to reduce expenses. He directed General Accounting to reduce the line cost expense for the Wireless division by $150 million. The Wireless division saw this and told Sullivan that there was no support to the entry and he was forced to reverse it. He then ordered the managers of the General Accounting department to make large ‘round-dollar’ journal entries that weren‟t related to the Wireless division without any documentation. They did not hesitate the first time because they believed in Sullivan‟s integrity and thought that he had most likely discovered an accounting loophole. Two years later, as the fraudulent reporting continued, the managers were very uncomfortable with what they were doing and the only reason they did not report the fraud was because they feared the loss of their well paying jobs. Over the two year period, WorldCom had made inappropriate accrual releases both in the domestic and international divisions that amounted to about $3.3 billion. As the accruals started to run out, Sullivan came up with another strategy: capitalization of line costs. Capitalizing Line Costs The 4% utilization of the fiber optic cables meant that WorldCom was still paying for the leases on the cables even though it was generating no revenue on them. According to Morse 28 (personal communication, February 8, 2011), WorldCom had leased the lines in a 2-5 year agreement that could not be canceled. However, the costs associated with the lines were causing the line cost E/R ratio to increase. Thus, when no more accruals could be released, Sullivan turned to capitalize these costs, another violation of GAAP. By capitalizing the costs from the cables, the 2-5 year leases now had 20-30 year lives which would slowly depreciate over the next two or three decades (Morse, personal communication, February 8, 2011). GAAP requires these costs to be recognized immediately. A Line Cost to Revenue report was generated for top management to which round number adjustments were made a week or so before the numbers were announced to the public (Zekany, Braun, & Warder, 2004). By the time the fraud was discovered, Sullivan had managed to improperly reduce the line costs by approximately $3.883 billion. Capitalizing the expenses resulted in shifting the items from the income statement onto the balance sheet, allowing the overstatement of income as well as the overstatement of assets. Admission of guilt WorldCom admitted to violating generally accepted accounting practices (GAAP), and adjusted their earnings by $11 billion dollars for 1999-2002. Looking at all of WorldCom’s financial activities for the period, experts estimate the total value of the accounting fraud at $79.5 billion. After Bankruptcy WorldCom was renamed MCI. Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged with fraud and violating securities laws. Ebbers was found guilty on all counts in March 2005 and sentenced to 25 years in prison, but is free on appeal. Sullivan pleaded guilty and took the stand against Ebbers in exchange for a more lenient sentence of five years. Re-Organization WorldCom took many steps toward reorganization, including securing $1.1 billion in loans and appointing Michael Capellas as chairman and CEO. WorldCom also tried to restore confidence in the company, including replacing the board members who failed to prevent the accounting scandal, firing many managers, reorganizing its finance and accounting functions, and making other changes designed to help correct past problems and prevent them from reoccurring. Additionally, the audit department staff is was increased and reported directly to the audit committee of the company’s new board. However, this reorganization was not enough to restore consumer and investor confidence, and Verizon Communications acquired MCI in December 2005. Verizon obtained the freshly minted MCI for $7.6 billion, but not the $35 billion of debt MCI had when it declared bankruptcy Aftermath The WorldCom accounting fraud changed the entire telecommunications industry. As part of their overvaluing strategy, WorldCom had also overestimated the rate of growth in Internet usage, and these estimates became the basis for many decisions made throughout the industry. AT&T, WorldCom/MCI’s largest competitor, was also acquired. Over 300,000 telecommunications workers lost their jobs as the telecommunications struggled to stabilize. Many people have blamed the rising number of telecommunication company failures and scandals on neophytes who had no experience in the telecommunication industry. They tried to transform their startups into gigantic full-serproviders like AT&T, but in an increasingly competitive industry, it was difficult for so many large companies could survive.
WorldCom Fraud Financial analysis
FINANCIAL ANALYSIS WorldCom’s improper accounting was mainly in two forms: 1. Report reduced line cost This served the purpose of reporting the line costs to 42% of the revenues, whereas in reality the line costs were much above 50%. This allowed Ebbers’ to report double digit growth(inflated). Line costs, during 1999 – 2001, were reduced via 1. Release of improper accruals (amount set aside to pay anticipated bills). 2. Capitalisation of line costs (recording cost as an asset rather than an expense). Release of improper accruals was done in three ways: · Using accruals without checking for excess available. · Using accruals meant for other expenses. · Releasing accruals in the period that it did not belong to, i.e. used them as emergency funds for personal gains. o (The reduction to line costs by accrual release, capitalisation, etc is shown in appendix B) o (The reduction to line costs by accrual release, capitalisation, etc as a percentage of total line cost is shown in appendix C) By capitalising operating costs, WorldCom shifted the high operating cost (line cost) from its income statement to its balance sheet. This increased its pre-tax income and earnings per share(EPS). The capitalized line costs in the first and second quarters of 2001 had been booked in “Construction in Progress”. In August, however, employees in Property Accounting transferred the capitalized line cost amounts out of Construction in Progress and into “in-service asset accounts” as some auditors had expressed interest in reviewing the former account. 2. Exaggerate reported revenues When market conditions deteriorated during 2000 and 2001, most companies in telecom sector reported reduced growth but WorldCom being a growth oriented company, reported same levels of growth (double digit growth). Due to pressure from CEO, the employees made false, fudged entries as revenues as and when they could. During investigation, SEC found hand written notes calculating the difference between desired and actual revenue(monthly) and appropriate(matching) entries were found in the books. Most of these fudged entries of revenues were made in the “Corporate unallocated revenue” account. These entries were recorded mostly after the end of the quarter and not during the quarter, suggesting these were adjusting entries. Also, these entries were always in round figures i.e. in millions or tens of millions. o (The extent of corporate unallocated account in which the revenues were shown falsely is shown in appendix E) 3. Other accounting issues Though in a small proportion, Accounting personnel improperly reduced three other categories of expenses; selling, general and administrative costs(SG&A), depreciation and income taxes. o (Summary of improper income statement amounts is shown in appendix A) CASE LEARNING 1. Ratios help detect accounting scandal These tests(ratios) do not indicate a fraud, but, indicate weak and accounting and give hints of financial trouble. · Accounts receivables growth versus sales growth: if accounts receivables grow faster than sales, then it means company is extending credit to customers who are not paying or has aggressive revenue recognition policy. Ideally this ratio should be negative, as it indicates that company is generating cash form its operations. · Property, Plant and Equipment (PPE) as a percentage of total assets: This ratio should be fairly stable over time. Spike in any direction indicates something is amiss. For example, a large spike indicates that a company is capitalising routine maintenance cost, as was the case in WorldCom. · Operating cash flow versus earnings per share(EPS): This ratio should be relatively stable over time and be negative. GAAP allows companies to match expense with revenue, when it is earned. Inventory cost is recorded as an expense when it is sold and not when it is bought. This reduces volatility. This causes the cash flow to decline with no change in earnings. Hence there is a difference between cash flow and EPS, but it should converge with time, as the sale is made. This property is used to detect health of organization. If EPS consistently exceeds operating cash flow, it indicates poor earning quality. Such companies make poor investments. There are other ratios which help detect fraud and accounting health of an organisation. Such warning signs do not necessarily indicate fraud, but show the health of the company and reflect on their poor performance. o (Effect and extent of capitalisation of operating costs is shown in appendix D)
Automobile industry report part 1
INTRODUCTION The Indian automobile industry has witnessed high growth over the last few years.The reasons for the same are: vast end-user market, better consumer sentiment and rise of liquidity in the financial system. The auto-components industry accounts for 7% of GDP and employs around 19 Mn people. Adequate government framework, increased disposable income, huge market, and better infrastructure have made India a favorable destination for investment. • Turnover of the Indian auto component sector stood at USD39 billion in FY2015–16; the industry is expected to reach USD115 billion by2020 • India is expected to become the 4th largest automobile producer across the world by 2020 after China, US and Japan. • In July 2015, India become the 3rd largest producer of steel in the world. Steel being a key raw material which is used in automobiles has been extremely advantageous. MARKET SIZE The Indian auto-components industry is classified into the organized and unorganized sectors. The organized sector caters to the Original Equipment Manufacturers (OEMs) and consists of high-value precision instruments while the unorganized sector comprises low-valued products and caters mostly to the aftermarket category. The Indian automobile industry is expected to grow by 8-10% in FY 2017-18, based on higher localization by OEM, higher component content per vehicle, and rising exports from India, as per ICRA Limited. The industry is expected to register a turnover of US$ 100 billion by 2020 backed by strong exports ranging between US$ 80- US$ 100 billion by 2026, from the current US$ 11.2 billion according to Automotive Component Manufacturers Association of India (ACMA) INVESTMENTS The cumulative FDI inflows into the Indian automobile industry during the period Apr 2000 – Mar 2016 were recorded at US$ 15.07 billion, as per data by the Department of Industrial Policy and Promotion (DIPP). Some of the major investments made into the Indian auto components sector are as follows: • JK Tyre and Industries Ltd, India's leading tyre manufacturer, has acquired Cavendish Industries Ltd (CIL) for Rs 2,200 crore (US$ 329.2 million), which will enable JK’s entry into the fast-growing two-wheeler and three-wheeler tyre market. • Japanese auto major Honda is planning to step up supply and target exporting of auto components worth Rs 1,500 crore (US$ 224.45 million) from India to it various international operations. • Auto components maker Bharat Forge Ltd (BFL), the flagship company of the US$ 3 billion Kalyani Group, has formalised agreement with Rolls-Royce Plc which will supply BFL with critical and high integrity forged and machined components • Canada’s Magna International Incorporated has started production at two facilities in Gujarat’s Sanand, which will supply auto parts to Ford Motor Co in India • Everstone Capital, a Singapore-based private equity (PE) firm, has purchased 51 per cent in Indian auto components maker SJS Enterprises for an estimated Rs 350 crore (US$ 51.35 million). • ArcelorMittal signed a joint venture agreement with Steel Authority of India Ltd (SAIL) to establish an automotive steel manufacturing facility in India. • German auto components maker Bosch Ltd opened its new factory at Bidadi, near Bengaluru, which is its fifth manufacturing plant in Karnataka. The company has also signed a memorandum of understanding (MoU) with Indian Institute of Science (IISc), Bengaluru with a view to strengthen Bosch’s research and development in areas including mobility and healthcare thereby driving innovation for India-centric requirements. • French tyre manufacturer Michelin announced plans to produce 16,000 tonnes of truck and bus tyres from its Indian facility this year, a 45 per cent rise from last year. • Amtek Auto Ltd acquired Germany-based Scholz Edelstahl GmbH through its 100 per cent Singapore-based subsidiary Amtek Precision Engineering Pte Ltd. • MRF Ltd plans to invest Rs 4,500 crore (US$ 660.231 million) in its two factories in Tamil Nadu as part of its expansion plan. • German luxury car maker Bayerische Motoren Werke AG’s ( BMW ’s) announced it will start sourcing parts from at least seven India-based auto parts makers in response to promote ‘Make in India’. • Hero MotoCorp is investing Rs 5,000 crore (US$ 733.59 million) in five manufacturing facilities across India, Colombia and Bangladesh, to increase its annual production capacity to 12 million units by 2020.
Automobile industry report part 2
GOVERNMENT INITIATIVES Government’s special focus on exports of small cars, MUVs, two and three-wheelers and auto components will result in rise in share of GDP. Deregulation of FDI in this sector has helped in increasing large investments in India. The GOI’s Automotive Mission Plan (AMP) 2016–2026 promises creation of an additional 50 Mn jobs along with increasing the value of the output of the sector to up to US$ 282.65 billion. MAJOR MARKET PLAYERS IN THE AUTOMOBILE SECTOR The automobile industry is divided into four segments, namely: • Two-wheelers • Passenger vehicles • Commercial vehicles • Three-wheelers Each of the above specified segments consists of multiple sub-segments. And these sub-segments are given in the figure given below. Major Market Players in Passenger vehicles: Passenger cars: • Maruti Suzuki (Market leader) • Hyundai • Honda • Tata Motors Utility Vehicles: • Mahindra & Mahindra (Market Leader) • Maruti Suzuki • Toyota • Hyundai Vans: • Maruti Suzuki (Market Leader) • Tata Motors • Mahindra & Mahindra Major Market Players in Commercial vehicles: Medium and Heavy Commercial Vehicles (M&HCV) • Tata Motors (Market Leader) • Ashok Leyland • VE Commercial Vehicles Light Commercial Vehicles (LCV) • Mahindra & Mahindra (Market Leader) • Tata Motors • Ashok Leyland Major Market Players in Two Wheelers: Motorcycles • Hero (Market Leader) • Honda • Bajaj Auto • TVS Scooters • Honda (Market Leader) • Hero • TVS • Mahindra Two Wheelers • Piaggio Mopeds • TVS Electric Two Wheelers • Hero Major Market Players in Three Wheelers: Passenger Carrier • Bajaj Auto (Market Leader) • Piaggio • Mahindra & Mahindra • Atul Auto Load Carrier • Piaggio (Market Leader) • Mahindra & Maindra Atul Auto • Scooters India Ltd. INDIAN TWO-WHEELER MARKET Indian Two-Wheeler Market is noticing a continuous upsurge in demand owes a lot to the launching of new attractive models at affordable prices, design innovations made from youths’ perspective and latest technology utilized in the manufacturing of vehicles. The sales volumes in the two-wheeler sector shot up from 15 percent to 24 percent between 2008-09 and 2013-14. At the end of 2014, the global business involving two-wheeler designing, manufacturing, engineering and selling was at an average of US$ 3.5 billion per manufacturer. However, India's Hero MotoCorp - the world's largest two-wheeler manufacturer and seller clocked an average of US$ 15 billion on the same lines. The domestic motorcycle sales volume moved up to 10 percent, whereas the scooter segment recorded a growth of 30.7 percent in sales volume. The motorcycle segment lags behind due to the fact that the recently launched gearless scooters cater to the needs of both men and women, while motorbikes are a segment preferred by men only. The following defines the growth of two-wheeler sector industry in India: Relatively Low Cost of Two-Wheelers in India. Steep Fall in Fuel (especially petrol) Prices. Reduced Excise Duty. High Interest Rates on Passenger Cars and LCVs. Though, further growth in Indian Two-Wheeler Industry will depend heavily on people’s personal disposable incomes that rely on India's economic growth in days to come. Indian Two-Wheeler Industry is the largest in the world as far as the volume of production and sales are concerned. India is the biggest two-wheeler market on this planet, registering an overall growth rate of 9.5% between 2006 and 2014. The volume growth recorded in the 2014-15 fiscal year stood at a commendable 14.8 %. The 'Make in India' campaign of the Government of India is also going to attract more foreign investment into Indian Two-Wheeler Industry creating further growth opportunities in the coming years. MARKET SIZE OF AUTOMOTIVE INDUSTRY IN INDIA According to the Society of Indian Automotive Manufacturers (SIAM), Indian automotive sector today is a $74 billion industry and by 2026, the industry is expected to achieve a turnover of $300 billion- clocking a CAGR of 15 percent. The Automotive Mission Plan (AMP) was drafted in 2006 to map the aspirations of the auto and auto component industry, to promote India as a preferred global manufacturing destination and introduced intervention and prescription mechanisms for promoting the industry. The first phase of the plan was called Automotive Mission Plan 2006-16 and focused broadly on five aspects: Economic growth, passenger comfort, sustainability, quality, and cost competitiveness. As per the ministry of heavy industries and public enterprises, for FY 2014, the automotive industry formed 7.1 percent of the GDP, 45 percent of the manufacturing GDP, contributed 4.3 percent to exports, and 13 percent of excise revenues. During 2006-16, the industry created 19 million additional jobs and saved 8.6 billion litres of fuel. TRENDS IN AUTOMOTIVE SECTOR Digitization, rise in automation, and new business models has revolutionized the automobile industry. Here are few disruptive technologies which are reasons for growth in automobile industry: § Mobility services The revenue pool of the industry is seeing rise in on-demand mobility services and data-driven services. This promises $1.5 Tn in additional revenue potential in 2030. This may lead to decline of private-vehicle sales, but this decline will be offset by rising sales in shared vehicles that need replacement more often due to higher usage and wear and tear. § Autonomous Technology Advanced driver-assistance systems (ADAS) will play a crucial role in preparing regulators, consumers, and corporations for the medium-term reality of cars taking over control from drivers. § Electrification Stricter emission laws, lower battery costs, and increasing consumer acceptance will create strong momentum for penetration of hybrid, plug-in, battery electric, and fuel cell vehicles in the coming years. § Augmented Reality Augmented reality will assist driver safety and impact areas from designing to repair. Augmented reality can help mechanics visualize what needs to be fixed before touching a wrench. This will lead to saving extensive time and money § 3D Printing 3D printing makes it cost-effective to build things. For example, rebuilding cars after a crash may lead to the same car being rebuilt and recycled over its lifetime to serve different lifestyles. § Machine learning based cyber security The cybersecurity systems are self-adapting and self-defending, creating ways to guard against new threats without any humans needing to program the system to identify specific incoming trouble § Predictive Analytics Predictive analytics uses data mining, statistics, modelling, machine learning and AI to analyse current data and make future predictions. Such intelligent technology will be critical in dealing with volatility, cost pressures, market shifts and competition. LATEST MERGERS AND ACQUISITIONS § Merger of Ashok Leyand and Hinduja Foundries Ashok Leyland’s merger with the auto-component maker Hinduja Foundries is considered a very pragmatic decision by the Hinduja group. The board of both the companies approved this decision in September 2016. Hinduja foundries is a very critical supplier to Ashok Leyland and constitutes to one-third of its revenue. § Motherson Sumi acquires auto business unit of Abraham and Co Hungary based Abraham and Co was acquired by auto component major Motherson Sumi Systems Ltd (MSSL) for about Rs.77 crore. MSSL through its 100% subsidiary would acquire the land, building and machinery of Abraham and Co Ltd for a purchase price consideration of EUR 10.4 million. § Mahindra & Mahindra’s acquisitions The company acquired SsangYong, Pinninfarina and BSA in the past year aligning its business strategy by creating more lifestyle brands. § Nissan acquires 34% stake in Mitsubishi Motors Nissan acquired 34% equity stake in Mitsubishi Motors to become its largest shareholder. Going forward Mitsubishi Motors will become a part of the global alliance with Nissan and Renault. § Samsung buys Harman International for $8 billion Samsung Electronics bought US auto parts maker Harman International industries for $8 billion. Also, this is company’s first venture to enter the growing market for automotive technology to manufacture connected cars. This deal has given the South Korean manufacturer an edge in the global market for online-connected auto parts. This deal is also considered to be the Samsung’s biggest deal in the firm’s history. § Ashok Leyland acquires LCV business from Nissan Motor Corporation Ashok Leyland completed the acquisition of Nissan Motor’s stake in each of its three joint ventures formed between the two companies. Under the new deal Ashok Leyland will build vehicles which are based on Nissan’s technology and design under a licensing agreement. § Bharat Forge acquires Walker Forge Tennessee, PMT Holdings Indian Auto component manufacturer completed the acquisition of Walker Forge Tennessee and PMT Holdings for around Rs. 95 crores. Walker Forge Tennessee is renamed as Bharat Forge Tennessee. The company is a supplier of complex and high alloy steel, engine and chassis components and has a diverse group of customers across automotive and industrial sector.
economy and autobile
IMPACT OF ECONOMY ON AUTOMOBILE SECTOR 2017 Union Budget initiatives aimed at pumping more money into the rural economy - especially after demonetisation; and a renewed focus on infrastructure development. The latter saw a marginally higher allocation of Rs 64,000 cr for highway development in particular. Another item that has seen mention in previous budgets as well is the specific outlay for the development of coastal roads -for better connectivity to ports and coastal villages. Under the Pradhan Mantri Gram Sadak Yojna roads work accelerated to 133 km roads per day in 2016-17 against 73 km per day during 2011-14. These farm-friendly policies that the Finance Minister has announced will really benefit the auto sector. This is even truer in the case of manufacturers of farm equipment like Mahindra and Tafe. Allocation for rural sector for Fiscal Year 2018 is Rs 1,87,200 cr, which is a record, and represents an increase of 24 per cent. The allocation under MNREGA increased to Rs 48,000 crore. This will benefit the two wheelersegment that sees a chunk of sales coming from Tier 3 towns and rural India, like Hero and HMSI. While the primary impact of demonetisation on the auto industry was really seen on rural sales, these measures will help overcome some of that. The rural thrust has helped makers of LCVs and mini trucks like Eicher, Tata and Mahindra for the same reason, with help of a good monsoon and rising profits in the agro-economy. Minister Jaitley's tweaking of tax slabs will also likely benefit the two wheeler sector, as income below Rs 2.5 lakh is now non-taxable, and income between Rs 2.5-5 lakh now sees the tax outgo halved to 5%. This increases the disposable income in the hands of buyers. It will allow more buyers to hasten their purchase decisions. It will increase the demand for second hand two wheelers and cars, which will impact new vehicle sales too. Even the car makers are expecting a positive push to sales though. The Income tax rate cut from 10% to 5% for individual tax payers earning under Rs. 5 lakh per annum will create a positive sentiment among likely first time buyers for entry level and small cars. GST also proved to favour auto makers with the tax burden reducing for all the segments. This has already pushed the sales up for car makers. However, the recent decision of GST Council to increase cess for luxury cars to 25%from earlier 15% will impact luxury auto-makers.